Ritter12 PPT CH08 Essay

Submitted By Jesus-Revilla
Words: 2780
Pages: 12

Chapter 8
Money and
Capital
Markets

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Learning Objectives
• Visualize the structure of the government bond market
• Explain the interaction of Eurodollars, CDs, and
Repurchase agreements and their connection to shortterm government debt
• Understand the market structure of the corporate and municipal debt markets
• Describe the structure of equity markets and they fundamentals that help determine their price

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-2

Introduction
• Market for U.S. government securities is the center of the money and capital markets
• U.S. Treasury has to sell many hundred billion dollars worth of securities each year to pay off maturing issues and finance current government operations
• Provides reference point for money market (debt less than one year) and capital markets (long-term debt/equities) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-3

The Government Bond Market
• When U.S. government runs a deficit, the
Treasury Department borrows money by selling government bonds
• Sell to anyone willing to lend money to U.S. government • Treasury issues a wide variety of maturities and types of government securities

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-4

CBO Federal Deficit Projections

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8-5

Federal Debt as Percentage of GDP
Actual and CBO Projections

The Government Bond Market
(Cont.)
• U.S. securities are basically two types
– Marketable [50%]--bought/sold in financial markets
– Nonmarketable [50%]--sell back to Treasury

• Types of Securities and Investors
– Treasury Bills (T-bills)
• Short-term—maturity of 3, 6 months or 1 year
• Zero-coupon—sold at discount below face value

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-7

The Government Bond Market
(Cont.)
• Types of Securities and Investors (Cont.)
– Treasury Notes
• Maturity between one and ten years
• Coupon instruments—interest usually paid semiannually

– Treasury Bonds
• Maturity longer than 10 year, up a maximum of 30 year
• Coupon instruments
• Coupons can be “stripped” and sold as separate instruments Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-8

The Government Bond Market
(Cont.)
• Types of Securities and Investors (Cont.)
– Treasury Inflation Protected Securities (TIPS)







Most complicated security issued by the Treasury
Issued in three maturities—5, 10, and 20 years
Interest is paid semi-annually
The principal of the TIPS grows at the same rate as inflation
Interest payments increase with the increased principal
Upon maturity, bearer receives higher of the original principal or principal grown at the rate of inflation

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-9

The Government Bond Market
(Cont.)
• Owners of marketable government securities
– Federal Reserve
• Purchases Open Market Operations—mostly T-bills
• Provides Fed with most of its income

– Private Sector





Commercial banks
Individuals
Insurance companies/Pension Funds
Money market mutual funds

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-10

The Government Bond Market
(Cont.)
• Owners of marketable government securities
(Cont.)
– Foreigners
• Now own about 50% of U.S. national debt
• Without foreign purchases, U.S. interest rates would be much higher
• Foreigners are attracted to U.S. securities:
– Political stability
– Financial freedom—Dollar is easily traded
– Relative high interest rates

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

8-11

Top Holders of Federal Debt

Country
China
Japan
Oil Exporters
Brazil

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Percentage
23.1%
21.2%
5.2%
4.5%

8-12

The Government Bond Market
(Cont.)
• How the Market Works
– Most trading takes place in over-the counter markets
– Trading in government…